A letter about the accounting prompts a probe at Kmart

January 26, 2002|By BLOOMBERG NEWS

TROY, Mich. - Kmart Corp., the discount chain that filed for bankruptcy protection Tuesday, is investigating an anonymous letter sent to its board and the U.S. Securities and Exchange Commission about a week ago that raised unspecified accounting matters.

The letter, purported to have come from Kmart employees and also sent to its auditors, was given to the board's audit committee, Kmart said yesterday.

The company said it contacted the SEC, which has authorized an investigation.

Kmart's board hired Deloitte & Touche LLP and the law firm Skadden, Arps, Slate, Meagher & Flom to assist the inquiry, said spokesman Jack Ferry. The unsigned letter arrived before Kmart sought to reorganize under Chapter 11 of the federal bankruptcy code, he said.

Kmart had been hurt by an unexpected drop in holiday sales, evaporation of the market for certain insurance bonds and the halting of shipments to its stores by suppliers including Fleming Cos.

The investigation is "a concern," said Sean Egan, managing director of Egan-Jones Ratings Co. "It suggests that the numbers the company reported are not reasonable."

Sensitivity to accounting has grown since energy trader Enron Corp. filed the largest U.S. bankruptcy reorganization and said it had overstated earnings by $586 million since 1997. Enron set up partnerships that concealed debts on its balance sheet, and its accounting failures have led several government leaders to call for tighter regulations of the accounting industry.

After Enron, "there is no surprise that the SEC will ask for additional information from any company that has suddenly failed," said Richard Hastings, vice president and retail sector analyst at Cyber Business Credit LLC.

Spokesman David Nestor at PricewaterhouseCoopers, Kmart's auditors, said the company has been notified of the retailer's investigation.

"We are cooperating with the company and with the outside counsel," Nestor said. He declined to comment further.

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